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Saturday, May 19, 2012

Why it can suck to be an American abroad

Pretend it's December of 2011. I've just landed in London on a plane full of Malaysian citizens. Since I'd rather not spend the rest of my birthday in an hours-long customs and immigration queue, I brush by the majority of the people on the flight in a manner that would win an Olympic speed walker gold. I make it to immigration with only a dozen people in front of me but it still takes the better part of an hour to get to the front of the line. I breathe a sigh of relief when I see that the girl just before me is holding a Canadian passport. She walks up to the desk and is through in a matter of seconds. Now it's my turn. I walk up, hand over my passport, get asked three questions, and waved through. With one last look over my shoulder at the couple hundred people who will probably be there for most of the night, I silently give thanks for how quickly an American passport can get you through an immigration line.

I hold on to that memory and try to bring it to mind whenever I'm faced with any of the more grim realities of being a US citizen abroad. Lately, however, that's becoming significantly more difficult.

The US is one of two countries on earth that taxes its citizens based upon their worldwide income. This means that every year while our non-American counterparts need only deal with the local tax authorities, we must file taxes both locally and with the IRS. I can't count the number of times I've heard people say something along the lines of, "but between the foreign earned income exclusion and double taxation treaties, it shouldn't be an issue". In our situation that's not the case. We've yet to live somewhere with a tax rate higher than that of the US federal government and we've cut many a check to the IRS. Please note here, that we pay our taxes and do not try to avoid them. We are not tax cheats and neither are the vast majority of Americans living abroad. Which is exactly why being treated as if we are on a yearly basis feels like a slap in the face.

Because the US government assumes that everyone holding money outside of the US is doing so to avoid paying taxes on it, every US citizen and permanent resident with more than $10,000 USD abroad must tell the Treasury Department annually exactly where it is and how much there has been in each account over the past year. Just for the record, this includes joint accounts held with a non-US citizen spouse. A lot of Americans living outside of the US aren't aware of this filing requirement and the penalties for ignoring it, even unknowingly, are steep. If you take advantage of the government's amnesty program you'll quite possibly be forfeiting more than a quarter of the previously undisclosed account to the US government.

The reporting requirements are continually evolving, and which types of accounts and assets must be reported are changing. I completely understand a non-US citizen not wanting the US government to have their financial information (heck, I'm exceedingly uncomfortable with them having all of MY account information), and can understand how the reporting requirement incentivizes US citizens living abroad and married to a non-US citizen to simply keep accounts in the name of the non-US spouse alone. That way they don't need to worry about accidentally leaving off something that should have been reported and as a result forfeit both their own money and that of their non-US citizen spouse. The attorney in me cringes at the great personal financial risk they'd be taking should the relationship ever end and all of the assets are only in the other person's name.

Thanks to the government's recent success with getting the information of accounts held by US citizens from foreign banks themselves, it's become increasingly difficult to find financial institutions willing to take and invest money for Americans. Take it from me, it's quite the pickle to find yourself in: brokerage firms and financial planners abroad want nothing to do with you because they don't want to have to deal with the US government, while at the same time investment firms in the US don't want to open an account for you because you're not living in the US and they don't want to deal with the government either. What are you supposed to do when no one will allow you to invest money because your government assumes that you're a tax dodger?

As if Americans abroad aren't already treated badly enough, now Chuck Schumer has introduced a bill that would force any American who renounces their citizenship for tax purposes to pay 30% on capital gains to the US government for the rest of their life. As I see it, there are two massive problems with this proposal. The first is that at the moment the capital gains tax rate in the US is 15%. The second is that US tax law (I.R.C. §877) assumes that anyone with above a certain net worth or above a certain annual tax liability who renounces their US citizenship does so for tax purposes. So basically, this would require all Americans who are worth above not an incredibly high amount and renounce their citizenship to pay capital gains tax at twice the current rate for the rest of their lives. This would be in addition to the exit tax (see above quoted section of the I.R.C.) that they must already pay because they have been deemed to be renouncing for tax purposes.

I understand that Americans abroad are an easy group on which to pick. We don't have a large lobbying presence in DC, and depending on which state we last lived in we might not even have the right to vote at a state level. Really though, this is going too far. Former US citizens don't have the right to vote at all. Levying a lifetime tax upon them brings to memory a certain rallying cry that we, as Americans, threw up as we were dumping tea into Boston harbor.

Mr. Schumer, as one of your former constituents, I find it very difficult to believe that you have nothing better to do with your time than pick on American expats.

15 comments:

The amount of people who are shocked when I mention having to file US taxes is unshockingly very high. Luckily for me I live in a country where taxes are higher than the US so I've not yet had to pay out.

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Ages ago, Sting was on Letterman and complained about taxation without representation. The U.S. was happy to take his tax money but he wasn't allowed to vote since he's a Brit.

If Schumer's bill goes through, I wonder if they would break it up into tax brackets instead of 30% across the board. It seems the ones they would really go after are the higher brackets (currently 33-35% tax).

I'm very lucky that my husband's company handles our taxes for us. However, my husband is cautious enough to do also calculate them himself to double-check their work. After all, if they mess up, we're the ones who are held liable.

If a U.S. citizen has zero earned U.S. income, do they still have to pay? That would suck.

Schumer's proposed tax is on capital gains, not income, which is treated differently by the US tax code and is currently taxed at a set rate of 15% regardless of your income tax bracket. Next year the tax on capital gains is going up to 20%, but that still isn't 30%.

For income taxation, the general rule is that income is taxed at its source. Unless you're an American and the source of your income isn't in the US, in which case your income is taxable both where you earned it and in the US. It depends on a given expat taxpayer's situation, but to answer your question, yes. It is very possible to have zero earned income in the US and still have to pay income taxes to the US government.

This is a topic on which I post quite frequently, from Reading the Signs of the Times (http://www.marginalboundaries.com/2012/05/reading-the-signs-of-the-times/) to Expats Have More Financial Freedom (http://www.theexpatguidebook.com/2012/05/22/expats-have-more-financial-freedom/).

Good to see someone else picking up the torch and "getting it". As a U.S. citizen living abroad, I'm intimately familiar with such things as well, and the only way to do it if you want financial independence is go the route of Eduardo and fully renounce your citizenship. Of course, this assumes you are working towards a secondary residency at the very least, and a secondary passport as well.

There's a lot of loopholes you can use as well. The first is, as you say, to put your money in a spouse's bank account. There are ways to go around getting burnt on this, especially if you have a pre-nup drawn up or some sort of contractual arrangement to ensure the money doesn't disappear if your relationship goes down the tubes, but they are on the local level and have nothing to do with U.S. law.

You can also set up and register companies in your secondary countries, have them pay local tax, and then pay yourself as an employee through said company. This allows you to take advantage of the 90k a year or so tax-free-if-you-work-for-a-foreign-bank route. Technically against the IRS's laws, but totally legal. Apple, Microsoft, all the big boys do it. Shell companies are NOT uncommon and are a totally legit form of doing business. It's now Apple saved 3 billion on taxes last year (http://www.theexpatguidebook.com/2012/05/08/apple-saves-billions-on-taxes-using-expat-loopholes-and-so-can-you/).

I was married to a Bulgarian (we were together for 8.5 years) and she never got her green card for the specific reasons mentioned above: she would have been automatically taxed on anything and everything associated with my name simply because of where I was born. We agreed that it just wasn't financially sound and had separate bank accounts in Bulgaria, plus I had my company based out of Bulgaria where income tax is much, much, much lower.

The hard part, as you say, is the fact that the U.S. is in panic mode right now so they are desperately clawing for every penny they can, and right now the expat lifestyle is seeing ALL of the richest, most powerful people and corporations in the U.S. moving abroad to Singapore, Brazil, Chile and other cities/countries. They keep putting all these laws in place that are making it very difficult to open up bank accounts or even do simple business in other countries, because the other countries are starting to say "Hell no" to the laws America is trying to enact.

They are a lot like the schoolyard bully who just beats everyone up until they hand over their lunch money....but the thing is, as you get older, you stop being afraid of the bully, and eventually you stand up to him. This is what's happening on a global level right now, and it's getting more and more difficult to do business abroad as a U.S. citizen without just fully renouncing. And now they are trying to enact laws (like the Ex-PATRIOT Act) which state that if you DO renounce, you are a terrorist, a tax evader and an automatic enemy of the state who is forever barred entry into the U.S., a place that was my home by no other accident than by birth.

This is why it's vital to get out NOW and start working on secondary citizenships.

Bah in the above post where I say "Technically against the IRS's laws, but totally legal.", what I meant was that it's against their policies/frowned upon, but not illegal to use loopholes.

The problem is that now they are trying to block up these loopholes and make all these retroactive laws that state "well, even if you DID pay your taxes while you were living in the U.S. and even though you renounced your citizenship five years ago...we're going to change the laws so we can go back in time and now you suddenly owe us 10 years worth of back-taxes that previously didn't exist".

It's gross desperation. This is why the smart Romans fled the crumbling empire, this is why the founding fathers of the U.S. fled Europe...when a government's policies begin to strangulate rather than foster growth, the intelligent people who aren't sheep naturally head to whatever shores that offer superior financial independence.

I should also state that it's important to pay attention to the countries which have tax treaties in place with the U.S. as well, to avoid dual-taxation.

Taxation for U.S. citizens is a landmine.

Also...if you make zero taxable income you technically don't owe taxes...but you are still required by law to file that zero amount...and if you don't file they will mark it as "breaking the law" even though you don't have income to tax, and they will hit you with fines and fees and suddenly you owe hundreds if not thousands. So even IF you are using totally legal loopholes it's best to file a tax return every year even if the number showing up is Zero.

Or, you can just totally renounce and tell the feds to stick it. Unfortunately, they are starting to DENY people's renunciation requests in light of Saverin and so many other wealthy elite renouncing. Basically the U.S. is saying look...if you are worth X amount of dollars, we are never going to let you go because you are our meal ticket", and that's that. When they can deny your right to renounce....well, desperate times call for desperate measures and thankfully there are still hundreds of loopholes you can use as long as you take the time to make yourself aware of them and research.

Didn't they deny Marc Rich's renunciation attempt? (Although if I recall correctly he never went to the embassy to do it). The IRS can keep accruing his taxes owed all they want. It doesn't mean they're ever going to see a dime of it if he never reenters the country, which I believe is his intention.

Re: dual taxation treaties--they only help if the rate of the country in which you earn your money is more than the US federal rate. If you're living in, for example, the Czech Republic or certain cantons in Switzerland and are earning above the foreign earned income exclusion amount you're going to owe the difference on everything above the exclusion to the US government.

@ Marc Rich: No, they didn't deny. What happened is that when he became a citizen of Spain he thought he automatically gave up his U.S. citizenship, but that's not the case. You have to go into a consulate/embassy and officially declare your intent and sign an oath of renunciation and go through an interview, during which they grill you about the WHY of your renunciation (because no sane person would want to give up U.S. citizenship, durrrrr)

The crap thing is that that these new laws they are introducing are going to make retroactive laws specifically for those who renounce. So, let's just say you are Saverin, and you paid your dues while living in the U.S. Paid your taxes, every year, like a good little worker bee. Then you started doing business abroad. More and more. Eventually you realize you are doing more business in X country than in the U.S., so you decide to switch residencies. Then, you decide that it's more beneficial to become a natural citizen of X country. So you renounce, you pay your exit fee, you square things up and you go on with your life. Then, three or five or six years down the road, the IRS will come knocking and say "Oh, we made this law that says that even though you haven't been a citizen or lived in the U.S. for the past four years, because you were here 10 years ago you now owe us all these taxes for this new law."

WTF????

The worst thing is they are starting to deny people's claims to renounce. The more money you make, the less likely they are to let you renounce, because that's $$$$$ to them, and the U.S. is broke.

The thing of it is...the U.S. is forcing the issue. They are making it so difficult to do business abroad as an American the ONLY option if you want to be financially independent is to renounce. Only now they are denying renunciations based on "Well, we think you are only doing this to get out of paying taxes."

Duh. What other reason is there? What other government in the world says "You haven't lived here in 10 years, you haven't worked for U.S. companies, you haven't used U.S. services...but you still owe Uncle Sam on that global income you're bringing in!"

It's just not fair, and it's the reason why there are record numbers of U.S. citizens renouncing in the past two years.

All very valid points. The government is backing a lot of expats into a corner and then acting shocked and horrified when they want to do the only thing that can get them out of it. I'm sure part of the US forcing the issue recently has to do with the record number of renunciations last year and the fact that people are starting to say that they want to renounce for financial reasons.

Sigh...sometimes you just have to wonder. Thanks for sharing the unpleasant news. Husband and I try to do everything by the book, but whatever happened to 'innocent until proven guilty'? Guess it went the way of 'no taxation without representation'.